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Sirius XM Guns for New Owners of 'Zombie Radio' Cars

Consumer Reports has partnered exclusively with 7 On Your Side to reveal the top used cars for teens.

For anyone who buys a recent-model used car, the hard sell might not end with the drive off the dealer lot.

A swelling wave of cars with inactive satellite radios is beginning to make it onto the second-hand market, and Sirius XM Radio Inc. (SIRI) is intent on attacking the new owners of these “zombie radio” vehicles to make them subscribers.

Sirius XM has cut deals with more than 10,000 car dealers across the country, including those in the auto manufacturers’ networks and large independent groups such as CarMax Inc. (KMX), to collect information on used-car buyers. Some dealers offer a 90-day free trial for the service. In other cases, Sirius XM will simply enliven the zombie radios by turning on the service a few times a year, and then follow up with a bombardment of marketing mailers.

While the prospect of pitching satellite radio subscriptions to the second and third owners of a car has been part of Sirius XM’s stated strategy for a while, it's only now becoming more relevant because the stock of cars equipped with satellite receivers and being unloaded by their initial owners is nearing critical mass.

Sirius XM, created by the merger of Sirius Satellite Radio and XM Satellite Radio five years ago, is the only commercial satellite-radio provider, with more than 25 million subscribers who pay an average of $10 per month for hundreds of exclusive commercial-free channels and syndicated third-party stations.

Most of the company’s growth has come through new-car sales. This year nearly 70% of new cars sold in North America were equipped with a Sirius XM receiver, up from 33% in 2007.

A fruitful growth opportunity

Kannan Venkateshwar, a Barclays Capital analyst who covers the cable and satellite business, believes going after used-car buyers is about to become a fruitful growth opportunity, because only now are a large number of satellite-ready cars turning over to a new owner.

Here’s how the numbers break down: Of the 56 million vehicles sold in the U.S. last year, only 15 million were new, 41 million used. Of that 41 million in "pre-owned" cars, some 21% were sold informally, buyer finding seller. This group is largely unreachable for Sirius XM because of difficulty getting information on the new buyers.

Yet the remaining 29 million used-car sales are made by franchised dealers connected to an automaker or independent dealers. Most of these outlets are covered by Sirius XM’s dealer agreements. On average, the first owner of a car holds onto it for just under six years. So only now are several vehicles from the mid- to late- 2000s – when a significant number had a satellite receiver installed – hitting the secondhand market.

Venkateshwar estimates that, of the 250 million cars on the road, the number with satellite radios will grow from the current 57 million to more than 100 million in 2017. About three-quarters of the people driving cars with inactive Sirius XM radios are the original owners, who presumably have dropped the service or made an affirmative decision not to pay for it. So the large-scale turnover of these vehicles to new owners is becoming a big target for Sirius XM to hawk their service.

Among the used-car owners the company is actively targeting,

Venkateshwar estimates it manages to convert somewhere around 30% into

paying subscribers.

Plain old “terrestrial radio” still dominates vehicle cabins, with more than $15 billion in advertising revenue last year across 12,000 stations, compared to $3.4 billion in subscriptions for Sirius XM. But terrestrial radio revenue has shrunk by 15% since 2001.

A broad battle

For sure, the battle for car speakers and dashboard touchscreens isn’t simply between Sirius XM and traditional broadcast radio.

Pandora Media Inc. (P), the music-streaming service, announced in June it would be integrated into 100 car models, allowing drivers to control the Pandora stream on their smartphones from the dashboard. Apple Inc.’s (AAPL) iRadio, an emerging Pandora competitor, is also expected to be built into some high-end car models.

Yet these services aren’t directly comparable with Sirius XM. They are personalized music offerings, for the most part, and therefore replacements for the car CD player rather than the array of live content Sirius XM delivers.

Comparing Pandora to Sirius XM, says Venkateshwar, is “like comparing Netflix to HBO.” Netflix Inc. (NFLX) provides a huge back catalog of video entertainment (now with a smattering of original content), while HBO has a fuller selection of exclusive originals for which it charges a premium.

Sirius XM is hoping millions of used-car buyers will crave Howard Stern, live sports from across the country and intense political-talk shows enough to pay $125 a year to animate those zombie radios.